Nations waking up to the importance of localization

Five years ago, a major maritime route was blocked and trade was obstructed. The news cycle is too swift for most of us to remember it. Yet, from March 23 to March 29, 2021, the Ever Given cargo ship obstructed the Suez Canal. While this only lasted a little over six days, it created a blockage in global supply chains that had tremendous economic consequences.

Lloyd’s List estimated at the time that the value of goods delayed each hour was $400 million, meaning that the obstruction disrupted $9.6 billion of goods daily. Ferdinand de Lesseps’ achievement of developing the Suez Canal was rendered useless, with ships forced to take the much longer and more costly route around the Cape of Good Hope, adding about 10 to 14 days to their journey and costing millions of dollars in extra fuel.

Just a year earlier, another major event caused a huge disruption to global supply chains: the COVID-19 pandemic. In hindsight, this was the first crisis to show how vulnerable every country has become in our globalized world. Nations’ dependency on resources, manufactured goods and essential products such as pharmaceuticals and even food were highlighted.

COVID-19 was the first crisis to show how vulnerable every country has become in our globalized world

Khaled Abou Zahr

This is why today, as the Iranian regime blocks the Strait of Hormuz — and most probably because of these other recent disruptions — the world is reacting in a much more constructive way.

The Iranian regime has been threatening to close the Strait of Hormuz for decades. Despite the pain this has caused, the world has not collapsed like many experts predicted when analyzing the threat. The interconnections of globalization have forced some trade-offs for Tehran. There are also other energy sources, as well as the fact that Saudi Arabia has already developed an oil pipeline that bypasses the strait.

This is a prime example of using technology and infrastructure investments to manage the risks to global supply chains. The Ever Given unwillingly blocked one of the world’s major maritime routes for all merchandise. Today, the mullahs are willingly blocking a maritime route for energy. They are two sides of the same coin.

Beyond crises, there are also some structural imbalances. Rare earth elements are a prime example. Today, the majority of rare-earths are mined in China and more than 80 percent are processed there, with smaller contributions from countries like the US, Australia and Myanmar. This concentration, similar to the materials and equipment used in the renewable energy industry, highlights a clear vulnerability in supply. Moreover, just like oil, these elements play a central role in the global economy and, more precisely, the supply chain for advanced technologies.

It is all about resilience and sustainability and the main goal is to avoid any disruption to several industries

Khaled Abou Zahr

From electric vehicle motors and wind turbines to smartphones and defense systems, there is a significant need for these elements. The disruption of this entire sector can be foreseen in potential export restrictions or new environmental regulations — not necessarily for geopolitical reasons, but simply that mining bottlenecks might occur.

So, the private sector in the US is looking for solutions to bridge this gap. Examples include increasing the recycling of rare earth elements from electronics and developing alternative materials. These could be short- to medium-term solutions. But for the long-term, we are noticing research into advanced extraction methods and the deployment of digital supply chain platforms that track and optimize sourcing across multiple regions. It is all about resilience and sustainability and the main goal is to avoid any disruption to several industries.

Even if it was not for what many describe as the end of globalization, nations have realized that localization is increasingly important. The sequencing of major events and global competition is encouraging countries across the world to rely ever more on sources closer to home and to develop new substitutes. If we also look at it from a “green” perspective, sourcing raw materials locally makes sense.

Looking at the pyramid of needs, it is very clear that, before rare-earths or even energy, food is a priority. All over the world, and particularly in the Gulf, we have been witnessing large investments to guarantee food security and reduce dependencies.

One of these innovations is controlled-environment agriculture, such as vertical farming, which has been gaining importance in the UAE and Saudi Arabia. While still in its early stages, the goal is to create year-round production while using minimal water. Hydroponics and aquaponics systems are also expanding, producing vegetables and fish with high efficiency and low land use. Then there are enhancements to traditional farming, such as precision agriculture — employing artificial intelligence, drones and smart sensors to optimize crop yields in arid environments. Lastly, investments in desert farming techniques, like salt-tolerant crops and greenhouse cultivation, are also growing.

It is also important to mention Fourth Industrial Revolution technologies, which are transforming supply chains by enabling localization. The use of smart technology, AI, robotics, cloud computing and additive manufacturing, to name a few, is helping create smart and efficient operations. These tools enable real-time monitoring, automation, data-driven decision-making and flexible production, transforming industries and supply chains into more resilient and adaptive systems.

If we go back to the mother or even grandmother of all disruptions in modern history, we realize how fast the COVID-19 pandemic severely disrupted global supply chains through factory shutdowns, congestion at ports, export bans and transport bottlenecks, imposing massive economic costs. The supply chain shocks alone reduced worldwide trade and industrial production, while driving inflation higher. This, in turn, caused a drop in global gross domestic product. These disruptions amplified the trillions in lost output and heightened inequality.

One of the key sectors to be impacted was pharmaceuticals. Due to the industry’s heavy reliance on China and India, its vulnerabilities were highlighted, especially with regard to active ingredients. The shortages of essential drugs and medications at a time of increased demand highlighted the need to transform the entire supply chain.

Since then, innovation has included modular and localized manufacturing facilities that produce drugs and vaccines closer to demand centers. We can also notice the development of new platforms and synthetic biology focused on rapid development and scalable production. Moreover, there has been a greater focus on digital tools, like AI-driven forecasting and blockchain tracking to optimize inventories, monitor raw materials and predict shortages.

If we go back to energy, the oil shocks of the 1970s are what kickstarted the desire to develop and maintain alternative sources, such as nuclear and renewables. But the pursuit of efficiency and cost reductions led to the creation of complex global supply chains for critical goods that are highly concentrated in specific regions. This concentration has exposed the fragility of these systems, as disruptions from pandemics to geopolitical tensions have shown us.

In short, this is a system in which a grain of sand can stop the entire mechanism, as we say in France. It is the search for resilience and control through localization that is really putting a dent in globalization.

• Khaled Abou Zahr is the founder of SpaceQuest Ventures, a space-focused investment platform. He is CEO of EurabiaMedia and editor of Al-Watan Al-Arabi.